For years, house-flippers have been chastised for their role in the real estate run-up. The Federal Reserve Bank of New York recently published a report confirming that “flipping” was a strong reason for the real estate bubble, especially in markets like Las Vegas.
As expected, media outlets jumped at the opportunity to tell us what we already knew, or at least thought anyway—all of it laid out cleanly by a body that helped oversee the very industry that provided loans to all those flippers in the mid-2000s.
But what the Fed won’t be saying is that today’s market desperately needs flippers in order to restore real estate pricing stability.
Paul Bell, president of the Greater Las Vegas Association of Realtors, says about 30 percent of the houses going up for trustee sale—the public auction required, per Nevada law, prior to a bank officially owning a property—are bought by investors and not taken back by banks. Most of these homes are fixed up and put back onto the market as flips, and safely command the current market rate and even slightly above it at times.
The biggest difference from the bubble years, Bell says, is that today’s flippers are cash-carrying investors who know the game.
“During the boom you had under-capitalized investors who really just didn’t know what they were doing. Serious investors were not in the market at that time,” Bell says.
Nasser Daneshvary, head of the Lied Institute for Real Estate Studies at UNLV, said it boils down to the simple fact that a cleaned-up, move-in ready house on the market as a flip is better than a short sale that likely won’t sell or a beat-up foreclosure. To him, it’s good for the market as a whole when investors take advantage of these opportunities.
“Heck, if I had time,” he says, “I might do it myself.”
In the Shadows
Over the past couple of years, real estate “shadow inventory” has become a begrudgingly accepted reality of the times. Banks, overwhelmed by the amount of houses on their books, are holding and slowly releasing homes to market in th e name of price stability.
When shadow inventory first came to light in 2009, pundits weighed in with how many homes they thought banks still held in Las Vegas. Estimates were as low as 10,000.
But those figures don’t take into account “internal” shadow inventory that the public never sees. Distressed Las Vegas properties are doing a vanishing act that is clearly manipulated by banks, says trustee sale action expert Tony Martin, the owner of LV Default.
Before taking a home back from a delinquent owner, a bank must advertise a notice of default and then a notice of trustee sale (or public auction). It can then postpone the sale up to three times before it needs to re-advertise it, incurring more costs.
But after postponing a sale, many banks are canceling sales entirely while they try to manage the glut of properties they have on their hands. When the trustee sale is canceled, the home—which is still not bank-owned—disappears from the notice system into a sort of real-estate limbo. There are about 70,000 shadow inventory units that are actually owned by the banks, Martin says, but he estimates that there are another 25,000 of these limbo properties out there.
It’s just another sign that there is a lot more foreclosure inventory than meets the eye—and possibly a much longer road to a normal market than many may think.